NZD Short Position Hits Record High as Market Expects RBNZ Tightening
The latest weekly IMM positioning data has revealed that Leveraged Funds' total short position in the New Zealand dollar (NZD) is at a record high since 2006. Despite this, NZD has been one of the top performers among G10 currencies on a year-to-date basis, ranking third behind NOK and AUD.
The Reserve Bank of New Zealand (RBNZ) policy rate currently stands at 2.50%, but market expectations suggest nearly 100bps of tightening over the next 12 months, as indicated by the OIS curve. However, with actual inflation rates at 4.1% (Q/Q), the real policy rate is more negative than in most other G10 countries.
The RBNZ's ability to deliver on this expected tightening may be questioned, given the recent increase in unemployment from 5.4% to 5.6%, despite strong employment growth. This suggests increased labour supply and economic slack, which could be further exacerbated by a sharp slowdown in net migration to 17.6k in the year to June 2022, down from a record high of 134k in June 2023.
The positioning data may also reflect a bilateral view versus AUD, as the AUD/NZD cross is key for NZD and Australia offers a more attractive yield pick-up with a relatively hawkish message on potential rate hikes from the RBA. The OIS curve for the RBA may be underpriced, and the RBNZ pricing too aggressive.